Is Becoming Your Own Insurance Company
Right For You?
You May Be Surprised!

How Many Other Ways Do You Have to Put Away
Up to $1.2 MILLION Dollars Pre-Tax?

While firing your regular insurance broker may not be in the cards, creating and owning your own Closely-held Insurance Company (”CIC” — also known as Captive Insurance Company) can provide both surprising and satisfying results.

(If you prefer “video”, click for a short, informative powerpoint presentation on Closely-held Insurance Companies.)

Fortune 500 companies have long used CICs to manage risks and gain tax advantages. However, it is only in the last decade that medium to small businesses have begun to take advantage of them as well. If the CIC is established and maintained properly, and if it’s suited to the economic needs of the business and its owners, it can be an ideal tool.

But we’re getting a little ahead of the story. (It’s easy to do — there are many exciting details!)

First, you are undoubtedly wondering, what the heck IS a “Closely-Held Insurance Company”?

The CIC is a legitimate insurance company, licensed to write insurance in the U.S., registered with the IRS, but, typically, based in an offshore jurisdiction, such as the British Virgin Islands. Most CICs are established in these countries. Why? Because of the capitalization requirements. However, many U.S. States have recently enacted CIC statutes in an effort to attract business and increase the state’s revenue.

How does a CIC work?

CICs are amazingly simple. An individual, company, or trust sets up and finds the needed money to form and capitalize a real live insurance company. Once setup, the CIC functions just as most insurance companies you are probably familiar with. The CIC sells insurance coverage to various businesses, takes the premium dollars and invests them to pay claims, and, when needed, goes to the reinsurance market to purchase reinsurance to cover catastrophic losses.

If the insurance claims of the CIC are low, the CIC will, over time, accumulate significant money. Depending on the CIC structure, the income will be taxed in various ways during the wealth accumulation phase as well as the payout phase to the CIC owner when money is needed.

Next, why would you possibly even consider forming your own CIC?

Well, obviously — having your own CIC can provide additional insurance coverage. But there’s more to it than that! There are two main reasons a medium to small business owner may consider a CIC:

1. Income tax reduction and wealth building.
2. Estate tax planning.

There are 3 types of CICs, although for owners of medium to small businesses, only two are relevant and therefore only those two will be discussed here.

Let’s look at the differences:

There are some important caveats to the information in the table above, which is presented to provide a general overview.

Small Insurance Companies:

• Can elect to be taxed only on investment income
• There are ways to eliminate the taxes on the investment income
• This increases the small CIC’s financial viability.
• How this is done is outside the scope of this article.

Very Small Insurance Companies:

• The premium income must represent more than 50% of the gross receipts.
• Due to significant abuses with 501(c) captives, Congress recently changed the laws to make 501(c)(15) captives not nearly as advantageous and most new captive are setup as 831(b)s (which is where there is a lot of opportunity for small business owners today).

Without going into a lot of detail, it should be obvious that if your company pays insurance premiums to your captive insurance company, it’s a tax deduction for your business — but free of federal income tax. What’s more, you can create types of insurance for risks that you might not otherwise be able to obtain from “regular” insurance companies. If there are no claims against the insurance company (and this is frequently done by creating insurance against unlikely risks), the company grows from the premiums.

At the time of retirement, you, the business owner, can close down the insurance company, take the money out and only pay long-term capital gains taxes on that money (15% today).

In addition, captive insurance companies can be one of, if not, the most powerful wealth transfer tool available to affluent business owners by tranferring company assets to heirs. If the CIC upon setup is owned by a client’s children or a trust for the benefit of the children, when a premium payment is paid from a business to a CIC, the client is effectively moving a tax deductible dollar out of his/her estate literally overnight. The effect is to avoid gift taxes and estate taxes.

Pretty amazing stuff, huh?

Of course, setting up and running a CIC is not free. That is why this strategy only works for business owners of affluent closely-held corporations. They can be structured a number of different ways. To setup a pure individually owned CIC will cost $40,000+, and the annual maintenance costs are typically $20,000-$25,000 a year. For this reason, CICs are not for everyone. But for the right person, it can be a magnificent tax reduction, wealth creation and estate planning tool.

A Word Of Caution

To create a CIC structure properly, you must use professionals who have expertise in this area. It is absolutely critical - especially the attorneys, accountants, and insurance managers involved. You do NOT want to go with a firm you found on the internet or heard about at a fly-by-night seminar. This is one area where “doing it right” is the only way to enjoy the CIC’s benefits while staying out of trouble with the IRS.

Does this sound like something that might work for you? Why not call our office to find out. Just call 1-800-490-8200 today, or sign up for your free, no-obligation consultation.